Barnett Formula

Lord Shipley Excerpts

Tuesday 17th December 2013 Grand Committee

Asked by

[Lord Shipley]

To ask Her Majesty’s Government what plans they have to review the Barnett Formula in the light of the Local Government Association’s recommendation that it be replaced with a new needs-based funding model.

[Lord Shipley (LD)]

My Lords, I first declare my vice-presidency of the Local Government Association, and I thank noble Lords taking part in this debate for their contributions.

I have asked to discuss the Barnett formula today for three reasons: first, because the debate that will take place over the next few months prior to the referendum on Scottish independence in September will cause the Barnett formula to be under close public scrutiny; secondly, because of the rising demand across England for devolved powers from Whitehall similar to those available to the devolved Administrations of Scotland, Wales and Northern Ireland; and thirdly, because public spending cuts in England are making people in England question why the Barnett formula exists. That is of course a question that the noble Lord, Lord Barnett, has himself asked many times. Indeed, it is unclear why it has been left alone for a generation, why it is so out of date and why it allocates more money to the devolved Administrations per capita than it does to England.

The Barnett formula was devised as a temporary measure to resolve problems over the funding allocations between England, Scotland, Northern Ireland and Wales ahead of the 1979 referendum on Scottish devolution. Many things have changed since the formula was created. As the Local Government Association chairman, Sir Merrick Cockell, said recently, it is “a historic relic”. He is right, because it has locked inequalities into its system of distribution. The consequence is that in terms of identifiable public spending by country and region, all three of the devolved Administrations have higher public spending per head of population than that of any English region, including London. The Office for National Statistics says that in 2011-12, Scotland received £10,088 per head, Wales £9,740, Northern Ireland £10,623 and England just £8,491; those are the latest available figures. It is very hard to justify England doing so relatively badly, not least because of the claim, sometimes correct, that public services in Scotland are better than in England. There is a rising tide of opinion in England that tax revenue is being raised in England but is then diverted from England to be spent in Scotland on higher standards of public services. However, that is not entirely true: the tax raised in England is actually raised in London. Furthermore, if the formula did not exist and if Scotland was independent, tax revenues from oil would broadly make up for the loss because 90% of the oil would be in Scottish waters.

A Select Committee of this House reviewed the Barnett formula in 2009. It pointed out that the formula was used to allocate over half the total public expenditure in Scotland, Wales and Northern Ireland. It also pointed out that although the annual increment in funds is made on the basis of recent population figures, the baseline, accumulated over the past 30 years, does not reflect today’s population in the devolved Administrations. It is therefore out of date and takes no account of the relative needs of any of the devolved Administrations. The Select Committee recommended a UK funding commission—which seems to me to be an extremely good idea—that would identify a small number of need indicators and oversee the transition to a new system of block grant made over between three and seven years. It has not happened, of course, but I would submit that it cannot be delayed for long.

I turn now to the rising demand for devolved powers in England. The recent London Finance Commission report, Raising the Capital, results from London’s boroughs and regional government looking closely at the issues of taxation and finance in the wider south-east region with a view to considering a Barnett formula-style settlement for the capital. That is welcome, except for one thing. I am increasingly aware of a rising tide of opinion in London that it should keep more of the taxes it raises. The implications of this are potentially very serious for the rest of the UK, which is why we need to think very hard, as a United Kingdom, about where taxes are raised and from whom, about what levels of public spending should apply in each part of the UK, and about a system in which need is the basis for distribution.

This debate now goes further than just London. The Core Cities Group, representing Birmingham, Bristol, Leeds, Liverpool, Manchester, Newcastle, Nottingham and Sheffield, is calling for a suite of fiscal reforms for England’s larger cities. The aim is the devolution of property tax revenue streams, including council tax, stamp duty, land tax and business rates, with the ability to reform those taxes while retaining prudential rules for borrowing similar to recent changes in Scotland through the Scotland Act and as now proposed for Wales. The aim would be to generate funding to stimulate economic growth according to local needs, allowing cities to raise sustained investment for vital infrastructure projects. These proposals would be cost-neutral at the point of devolution, with no additional money being sought from the national pot beyond that which the core cities already receive, along with the ability to raise new local taxes. Such reforms would give practical effect to the ambition of the coalition Government to promote “radical devolution”. Together, the English core cities and London represent more than half of the UK economy and almost half the population, but they control only around 5% of the taxes raised in their areas. Empowered cities could join up public services and reduce dependency on London, which takes me to the current state of local government finances in England.

Last week’s Autumn Statement exempted local government from the further reductions that were applied to Whitehall departments. These measures are welcome. However, some council services are in serious difficulty, particularly because those councils more dependent on central grant cannot raise large sums through council tax and other fees and charges. Central grants for local government are to be cut by 43% by 2015-16, and there will be a funding gap of more than £15 billion by the end of the decade if things go on as they are. That takes me to the issue of fairness.

The way the Barnett formula is calculated is widely acknowledged to give more to Scotland and Northern Ireland compared with their relative needs, and less to England and Wales than their relative needs would justify, by more than £4 billion a year. This is unsustainable. Governments have consistently said over many years that they will not review the Barnett formula and, in the case of this Government, not until the public finances are stabilised. I understand the Government’s predicament. I do not argue that Scotland should necessarily get less because I believe in a funding system based upon a needs assessment, but I do argue that Wales and the constituent parts of England should be treated equally and empowered to create more of their own tax income.

As an example, Birmingham has called for a single funding pot at the city region level for local authority spending, health, and for expenditure by the Department for Work and Pensions. Savings are there to be made by reducing duplication. If the referendum next September in Scotland is in favour of independence the Barnett formula will be abolished. If there is a no vote there will inevitably be a debate about yet further devolution beyond the Scotland Act, and I personally would welcome that. When that debate happens there will be a rising demand for the fiscal and political devolution offered to Scotland also to be available in England, with a system of allocation based on needs. Now is the time to act and to set up the UK funding commission proposed by the Select Committee of your Lordships’ House four years ago. We should create a place-based system of finance in England. This could be based on the governance that has developed locally—combined authorities, health and well-being boards, joint committees, local enterprise partnerships and so on. We should give local government and their partner organisations the power to allow individual areas to shape public services and investment, and to incentivise local growth by devolving powers on taxes and spending to suit local needs beyond the 50% permitted from growth in business rates.

In conclusion, it is important that we are not divisive. We should learn from the wealth of evidence on this issue and have a mature discussion as a United Kingdom on how devolution can drive growth and a bigger local tax base, as well as on how resources can be allocated more fairly on the basis of need. In the mean time, as we await the local government settlement tomorrow, it will not be enough for the Government yet again to push this issue into the long grass.